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Jammal v. American Family Decision Overturned by Court of Appeals (January 2019)

Read the 25-Page Opinion from Judge Nugent (Members Only)

By Robert E. O'Connor, NASFA Legal Counsel

As an organization, NASFA has been closely following the Jammal v. American Family in a Federal Court "employee" misclassification case. Originally filed in Ohio, the case was tried over twelve days before a judge and an advisory jury. The judge then issued his 44-page opinion on August 1, 2017. Our analysis of the Trial Court's opinion is available to members here (Members Only).

Jammal is important to State Farm agents because of the similarity in treatment by American Family of its agents to State Farm's treatment of you. Most of the work facts used by Jammal to substantiate his claim were facts very similar to the State Farm Agency. The detailed analysis by the trial court looked at over thirty different agency work situations, and found that the detailed oversight, or interference by American Family, created an employment situation, rather than the "independent contractor" status that was claimed in the Agent's Agreement. The trial court then went on to find that the agents were employees for purposes of ERISA, and therefore entitled to all of the employee fringe benefits offered to other American Family employees. Since that decision would drastically change how American Family had to deal with agents, it was no surprise when it appealed the decision to the Sixth Circuit of the United States Court of Appeals. That appeal was decided on January 29, 2019. The Appeals Court found that the Agents were not, in fact, employees for purposes of ERISA. Rejecting in particular two of the basis for the original finding, the Appeals Court found that American Family Agents are not employees.

Given the significance of the issue, we would expect the agents to ask the United States Supreme Court to hear an appeal. That process will take over a year.

The Appeals Court summarized the issue on appeal saying: "The agents claim that American Family misclassified them as independent contractors, while treating them as employees, in order to avoid paying them benefits in compliance with ERISA."

The Appeals Court summarized the arguments of the parties, setting forth the reasons for each position. American Family pointed out, supporting its claim of "independent contractor" status, that:

  • All agents signed a written contract, stating they were independent contractors;
  • That agents paid their own taxes;
  • That agents deducted their business expenses;
  • That agents were paid commissions, not salaries;
  • That agents were not provided vacation pay, holiday pay, sick pay, or paid time off.

Moreover, American Family calls its agents "business owners, and partners," telling new agents they will own their own businesses and that they will need to invest in "their business." American Family agents work at their own offices, set their own hours and pay their own staff. Agents provide most of the resources necessary to run their agencies, such as office furniture and supplies.

From the American Family Agent's side, the court noted that the evidence showed that:

  • Everyone else at American Family is classified as an employee;
  • That agents are required to report to a Sales Manager;
  • That Sales Managers had no training on the Independent Contractor status, or how to treat the agents differently than employees.

Giving examples of the day-to-day control exercised by American Family, the agents pointed out that Managers:

  • Exerted a great amount of control over day to day activities;
  • Required daily activity reports;
  • Prioritized sales;
  • Required night "life calls";
  • Approved and controlled office location and relocation;
  • Are involved in the hiring and firing of agent's staff.

The court spent a great deal of time in its opinion, discussing how American Family trains its agents to sell. Apparently, American Family prefers that its new agents have no prior insurance sales experience and even if they do, they are retrained in the "American Family" way of selling insurance. Further, the agents pointed out and the court reviewed the facts that Agents:

  • Can only sell American Family products and are forbidden to sell for other carriers;
  • Are discouraged from taking other work, even noninsurance work;
  • Are prohibited for a year from soliciting for insurance prior customers.

Also, the Agents Agreement has no set duration, and there are "termination benefits" similar to State Farm Termination payments. The American Family agents do not own their agencies, or the policies assigned to them, and thus cannot sell either their agencies or their policies, unlike other business owners.

The Appeals Court, after detailing the facts above then gave a long dissertation regarding what the "standard of review" should be for the case. That issue, "standard of review," can and does in this case create the backdrop upon which the Court of Appeals found it was entitled to reverse the findings of the trial court. Basically, "standard of review" is an excuse for an appeals court to interfere with the findings of a trial court. By saying something is a legal question rather than a factual question, an appeals court can delve into a finding of fact and change it.

The American System of Justice works on the basis of precedent. That means that once a court has decided a question of law, that decision is controlling in all similar cases in the future. The precedent case for ERISA issues is Nationwide Mutual Insurance Co. v. Darden, decided by the United States Supreme Court in 1992. Darden enunciates the following standard for determining who qualifies as an "employee" under ERISA, saying:

"In determining whether the hired party is an employee under the general common law of agency, we consider the hiring party's right to control the manner and means by which the product is accomplished. Among the other factors relevant to this inquiry are the skill required; the source of the instrumentalities and tools; the location of the work; the duration of the relationship between the parties; whether the hiring party has the right to assign additional projects to the hired party; the extent of the hired party's discretion over the when and how to work; the method of payment; the hired party's role in hiring and paying assistants; whether the work is part of the regular business of the hiring party; whether the hiring party is in the business; the provision of employee benefits; and the tax treatment of the hired party."

In a later case, the court added that an express agreement between the parties would also be a relevant consideration.

The crux of the Darden common law agency test is the hiring party's right to control the manner and means by which the product is accomplished.

The Court of Appeals found, after analysis, that the trial court had incorrectly applied the legal standards in determining the Darden factors relating to (1) the skill required of an agent and (2) the hiring and paying of assistants. The Appeals Court goes on to say that had the trial court done this properly, the decision would have been in favor of independent contractor status rather than employee.

There are many cases around the country (precedent) discussing the skill necessary to be an insurance agent. In the Sixth Circuit there have been other cases finding that the sale of insurance is a highly specialized field that requires considerable training, education, and skill. Despite American Family's preference for untrained agents at the time of hire, the appeals court finds that this "specialized skill" finding from previous cases is controlling.

In the Court of Appeals second finding of error in the lower court's analysis, it states that: "the hired party's role in hiring and paying assistants" was incorrectly weighed and determined. Despite the fact that American Family insisted on lengthy pre-qualifications for agent staff, and a lifetime non-solicitation agreement and a right to fire any staff at any time, these factors favored independent contractor status.

With that, the Appeals Court reverses the finding of "employee" status for American Family Insurance Agents.

There is then a 10-page dissenting opinion by one of the judges on the appeals panel. Basically, he says that the analysis by the majority is erroneous. He disagrees with the majority's method of finding "facts" when they should have been left alone on appeal. He disagrees in detail with the findings of the majority regarding the two Darden facts they use to support the reversal. This dissent is good reading for a lay person. It clearly shows how smart judges can disagree on what the law is, and how the law should be applied to a particular case. This well reasoned dissent is probably part of the basis for an appeal to the Supreme Court. Like minded individual judges can earnestly disagree on how the law should be applied to Captive Insurance Agents.

Make no mistake, NASFA firmly believes that State Farm agents are best served by being Independent Contractors. We neither seek nor support efforts to make State Farm agents employees. However, the Jammal case should hopefully influence State Farm to be less intrusive into how you operate your agency. We will continue to report developments as they occur.

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